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Role of Compliance Officer – Relevance of Standard Operating Procedures for compliance under SEBI (PIT) Regulations 2015 - MMJC
Introduction
Compliance Officer under Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [‘PIT Regulations’] is responsible for administering the code of conduct and other requirements under PIT Regulations[1]. Model Code of conduct as per PIT Regulations states that compliance officer would be responsible for closure of trading window, granting pre-clearance, relaxing provisions relating to contra trade, tracking of trades etc. There have been cases where compliance officer is held liable by SEBI for not administering the compliance with code of conduct and various other requirement under PIT Regulations. This article highlights orders passed by SEBI where compliance officer is held liable for non-closure of trading window and cases where he has been left without penalty.
Trading window closure related cases
Penalties levied by SEBI on Compliance Officer for not closure of trading window were prima facie relating to Unpublished Price Sensitive Information [‘UPSI’] other than financial results.
- SEBI Adjudication order in the matter of Edelweiss Financial Services Ltd: Edelweiss Financial Services is a NBFC listed on recognized stock exchanges. Compliance Officer of Edelweiss Financial Services was penalized for not closing trading window when an acquisition was being considered by step down subsidiary company. This acquisition being made by step down subsidiary company was of around Rs 4 crore. This acquisition of Rs 4 crore was of miniscule amount as compared to turnover and net worth of Edelweiss Financial Services. Compliance officer argued that as acquisition being considered by step down subsidiary company was of negligible value it was not considered as UPSI. SEBI while analysing the stock exchange disclosure in this regard stated that the disclosure of this acquisition to stock exchange showed that it was a strategic acquisition for Edelweiss Financial Services. As it was a strategic decision this acquisition was considered as UPSI irrespective of the amount. SEBI penalized the compliance officer for not closing trading window in this regard[2].
- SEBI Adjudication order in the matter of Essar Shipping ltd: In this case, the compliance officer was penalized by SEBI for not closing trading window when “Conversion of Foreign Currency Convertible Bonds into equity shares” was due. SEBI alleged that this period during which conversion of FCCB into equity shares was due was UPSI period. Compliance officer argued that the fact that FCCBs would be converted into equity shares at a certain time was already available in public domain through annual reports. SEBI stated that even if it was known that FCCBs are due for conversion during this period but it was not clear whether FCCBs would be converted into equity shares or would be repaid?. SEBI further stated that the decision of the company to convert FCCB into equity shares and not repay the bonds shows that company was facing cash crunch. Hence SEBI affirmed that the decision to not repay the FCCB holders and instead convert it into equity shares was UPSI[1].
- SEBI Adjudication order in the matter of CARE Ratings Ltd: In this case the compliance officer was penalized for non-closure of trading window when there was a credit rating downgrade by CARE Ratings on a particular security of the company. In this the compliance office argued that on receipt of intimation of downgrade of credit rating, discussion were going on within the management to challenge credit ratings granted by CARE Ratings. As discussions were on and we were confident that CARE Ratings would cancel the downgrade of credit rating trading window was not closed. SEBI did not accept this argument stating that even though discussions were on with CARE Ratings, but the fact remained that there was a downgrade which was a UPSI and hence that required trading window closure[1].
- SEBI adjudication order in the matter of Future Retail Ltd: In this case compliance officer was penalized for not expressly closing trading window during demerger transactions and merely taking undertakings from designated persons associated with demerger transaction. In this case compliance officer argued that as few people involved in the transaction for demerger it was decided to not to close the trading window for all designated persons at large. SEBI did not accept this argument and stated that even if all designated persons were not involved in the transaction, but the trading window cannot be closed selectively for few designated persons[2].
- SEBI adjudication order in the matter of Shilpi Cable Technology ltd: In another case the compliance officer was penalized for not closing trading window when demand notice was received by company. In this company had received a demand notice from operational creditor under section 8 of Insolvency and Bankruptcy Code, 2016. SEBI alleged that this was the start date of UPSI. This UPSI became public on the date of disclosure to stock exchange of filing of application by operational creditor before National Company Law Tribunal, Delhi under section 8 and 9 of Insolvency and Bankruptcy Code, 2016[3]. Compliance Officer in this case argued that he was not made aware of such notice being received and hence had not closed trading window. SEBI did not accept this argument and penalized the compliance officer.
- Settlement orders in the matter of Bliss GVS Pharma Ltd and Kanoria Chemicals and Industries Ltd: In these cases, Compliance Officers have settled the matters pertaining to non-closure of trading window with SEBI. One case was pertaining to non-closure of trading window during UPSI period relating to entry of subsidiary of listed company into a new business[4] and another was when company was going to sale one of the division which was contributing 70% of the revenue of the listed company[5].
Case where penalty not levied by SEBI for non-closure of trading window.
- SEBI adjudication order in the matter of NIIT Technologies Ltd: In this case a SEBI left the compliance officer without levying penalty for not closing trading window when “default notice was received from a customer for significant amount’. This information was considered as unpublished price sensitive information. Question had arisen whether the interim company secretary was in possession of UPSI and was required to close the trading window? In this case SEBI on investigation stated that appointment of the Noticee was made as an interim company secretary. Interim company secretary did not have access to many documents and their role was limited to secretarial work. Further interim company secretary did not have permission to attend the board meetings. SEBI further noted that interim company secretary was not appointed as the compliance officer under PIT during the UPSI period. SEBI further noted list of designated persons who had access to UPSI also did not have name of interim company secretary. SEBI considering this had not levied penalty[6].
These cases depict various scenarios (viz. demerger, disputes with clients and demand thereof, downgrade of credit ratings, acquisitions, conversion of securities etc.) a corporate entity might face apart from the regular event of financial results where it is necessary to understand whether that event can be considered as UPSI. It is also observed that whenever compliance officer had failed to demonstrate his efforts in compliance with PIT Regulations with respect to trading window closure SEBI has held compliance officers liable. But where the compliance officers could demonstrate their efforts in ensuring compliance with trading window closure related provisions SEBI has not levied penalties.
Conclusion:
It is necessary for compliance officer under PIT Regulations to have processes for Identification of UPSI and procedure as to what shall be done when UPSI is identified. Standard Operating Procedures [‘SOP’] would bring in certainty and clarity throughout the organisation in the procedure for compliance with PIT Regulations. SOP would also act as a defense while deposing before enforcement authorities to demonstrate that there was no arbitrariness in complying with PIT Regulations.
This article in written in Taxmann. The link to the same is as follows: –
This article is written by CS Vallabh M Joshi – Senior Manager – vallabhjoshi@mmjc.in
[1] Reg. 9(3): Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations.
[3] E2022_JO2021695.PDF (sat.gov.in); https://www.sebi.gov.in/enforcement/orders/sep-2021/adjudication-order-in-respect-of-awaneesh-srivastava-in-the-matter-of-essar-shipping-ltd-_52309.html